Simple Moving Average (SMA)

One of the easiest indicators to understand is the Simple Moving Average, or SMA. SMA shows the average price of the previous period.  For example, if the period is 20 days, the SMA for closing price is the average closing price of the previous 20 days.

Trading signals
Go Long : SMA(shorter period) cross above SMA(longer period)
Go Short: SMA(shorter period) cross below SMA(longer period)

Above shows four SMA lines with a period of 5,10,30 and 60 days for MSFT (Nasdaq - Microsoft).  These SMA lines are frequently used indicators for the trend of a stock. A short period SMA line would have more whipsaw effect because shorter period caused SMA to track more closely to the overall trend of the stock. Using these indicators for a trending stock such as this, the following trades might have made by assuming that trading made at the open price on the following day when SMA generated a trading signal base on SMA with a period of 5 days, SMA(5) and SMA with a period of 30 days, SMA(30).Please note that the profit is calculated solely on the difference of the open position price and close position price excluded the commission and etc.

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